We are reaching a time of the year when some SMSF trustees will learn that their funds have inadvertently breached one of the most fundamental set of provisions in superannuation law: the in-house asset rules.
Under the in-house rules, SMSFs are generally prohibited from having investments, providing leases or making loans with related parties* that exceed five per cent of a fund’s total asset value. (The limited exceptions to this rule include business real estate.)
In-house assets are valued against the five per cent limit when acquired and on 30 June each year. And, of course, 30 June, 2016 is fast approaching.
A rise in the value of an in-house asset, the poor performance of some other fund-owned assets or a member withdrawing benefits upon retirement are among the circumstances that may lead to an unintentional overshooting of the in-house limit.
Fund trustees who breach the in-house asset rule may pay a high price – apart from any penalties. If the five per cent limit is exceeded at 30 June of any year, trustees must prepare a written plan outlining steps that will be taken in the following financial year to dispose of in-house to the value of the excess. (The disposals must take place even if the in-house assets subsequently decrease in value below the five per cent limit.)
This may lead to the unwelcomed disposal of a valued asset at a time not of the trustee’s choosing.
The in-house asset rules are extremely complex and professional advice, perhaps from an SMSF specialist, should be considered in how to deal with a breach or potential breach.
SMSFs trustees who are aware some time before the end of a financial year that changes in asset values may lead to a contravention of the in-house asset rules may be in the position to take remedial action. This may include making extra contributions before 30 June if possible to increase the proportion of non-in-house assets.
Obviously, any remedial action should not be left until the closing days of a financial year when it may be too late.
A new financial year resolution worth thinking about and possibly discussing with an adviser is how to effectively monitor the changing value of in-house assets against a fund’s overall assets rather than receiving an end-of-financial-year surprise.
* There is no exemption under the in-house rules to the prohibition on SMSFs lending money or giving financial assistance to a member or a member’s relative. (Other related parties of an SMSF include members’ business partners, and companies or trusts controlled by the members or their associates.)
 |
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
|
